When your occupancy is below target, do you respond by changing pricing, offering a special, or increasing your marketing budget?
Each is helpful, but they're only quick fixes. How can you ensure vacancies won't become a problem again?
Leaning more into lease renewals can help you stay ahead of the ongoing vacancy game because the more leases you can keep, the easier it'll be to navigate through seasons of higher turnover.
(Plus, they're great for your community's NOI!)
In this blog:
Vacancy should be monitored year-round, and specific cues should lead you to when there is a small problem so that you can fix it before it becomes a significant problem.
With a well-thought-out strategy for lease renewals, small vacancy problems remain minor and easily solvable.
You can have the right number of move-outs occurring at the right time of year and shorten vacancy duration.
Which brings us to our next point…
Getting out of a large vacancy crisis usually takes a significant toll on Net Operating Income (NOI). Instead of implementing a rent discount on a few individual units, you may be forced to offer discounts on floorplans or, worse, the community at large.
Maximizing your NOI becomes a habit when you lean into your renewal process as it can help you avoid having to make major, costly adjustments to rents or marketing.
(That's not to mention the marketing investment increase needed to drive more web traffic to your apartment community's website.)
But when earning more lease renewals, you're actively minimizing vacancy while lowering your turnover rate year-round.
Maximizing your NOI becomes a habit when you lean into your renewal process as it can help you avoid having to make major, costly adjustments to rents or marketing.
No matter what you do, you must accept that people will leave your community when their lease expires for many reasons outside of your control. Perhaps they're getting married, got a new job, or are graduating from school. As long as those residents leave amicably, happy with their leasing experience, you know you're doing something right.
If you're struggling to get lease renewals, the first place to start is to make sure your community is one that any tenant would be sad to leave.
But if you're continually struggling to retain residents at a reasonable rate, and your turnover rate is higher than you want, you could also have a deeper underlying problem. While you can't control what every resident decides to do when their lease expires, you at least have some control over their living experience.
And that's the first place to start if you're struggling to get lease renewals—making sure your community is one that any tenant would be sad to leave.
This means you need to ensure you're:
These are crucial ways to interact and care for your community’s residents well. Although you can work on creating a great living experience, ultimately, you still need lease renewal strategies that protect your profit and create a near-seamless transition between residents.
Regarding pricing in lease renewals, you can charge whatever the market rate currently is when a lease expires, or you could charge less than or equal to the rent the resident had been paying.
Which methodology you choose depends on your community's leasing performance because you can't let pricing in lease renewals be detrimental to your occupancy or revenue.
First, you need to understand the rent for the unit that's up for lease renewal if it were actually vacant.
For example, the current tenant is paying $1,200/month, but the market rate went up 20% then. That means a new resident would have to pay an increased rent of $1,440/month for that same unit.
Charging the market rate to an existing resident isn't unethical, even though it's more than what they previously paid. The key in choosing this philosophy is you must also be charging new residents that same higher rate and not charging new residents less to sign more leases.
Charging the market rate to an existing resident isn't unethical, even though it's more than what they previously paid. The key in choosing this philosophy is you must also be charging new residents that same higher rate and not charging new residents less to sign more leases.
Offering an existing resident a higher rent rate than a new resident would create negative blowback, and word will spread. You're almost guaranteeing a move-out, hurting existing residents' impressions of your apartment community. That could lead to an increase in bad reviews, which could hurt your ability to attract future new residents who see those reviews during their search.
That's why we firmly believe it's best to offer an existing resident less than or equal to the same rent rate as a new resident would pay if you're charging the market rate, and that amount has increased since they signed their first lease.
That said, choosing to charge the current market rate at renewal—especially if the market has gone up—may have some drawbacks. To safeguard your community from experiencing huge turnover in that scenario, we'd recommend trying the following:
This other philosophy, of course, is much easier to apply. Offering an existing resident a lower rental rate than what they're currently paying is a reward for their loyalty, and there's nothing wrong with choosing to do so.
In fact, offering renewals below the current resident's rate is the brightest move any apartment operator can make when rental rates fall (especially as we head into 2024...more on that later).
You have to be careful not to offer a renewal rent price that is too low. While you can retain more residents and decrease your turnover with such a tactic, excessively under charging will ultimately hurt your revenue.
You win when you retain more residents in a down market by avoiding the costs of turnover, vacancy loss, and marketing for those vacant units.
But you still have to be careful not to offer a renewal rent price that is too low. While you can retain more residents and decrease your turnover with such a tactic, excessively under charging will ultimately hurt your revenue.
To maximize your community's revenue in this scenario, here's what we'd recommend:
These pricing philosophies work best when the tenant seeks to renew their lease for another 12-month term. However, your strategy should change if the tenant is interested in shorter or more variable lease terms.
Finding a suitable middle ground between your apartment community's and the resident's best interest can be tricky. That's what we'll focus on next.
When establishing the various lease terms in your renewal offers, remember the ultimate goal: position yourself to have more leases expire during seasons when your apartments are in high demand.
You can set multiple lease renewal terms—month-to-month, two, six, eight months, and on down the line—but that doesn't mean you should offer all. We'd recommend offering each resident no more than three term options in a lease renewal.
Which three lease term options you offer are an integral part of the strategy.
You first need to have an acute understanding of your apartment community's unique seasonality to provide lease terms and pricing in renewal offers that protect you from having more move-outs occur at slower times of the year. This blog post discusses using traffic data from your apartment community's website to determine your seasonality.
With this knowledge, you can map out the ideal number of leases you'd want to expire each month and use this as your guide when choosing the lease terms you will offer.
When establishing the various lease terms in your renewal offers, remember the ultimate goal: position yourself to have more leases expire during seasons when your apartments are in high demand.
Say, for example, that you have a lease expiring in July. Knowing that this is typically around the time when apartments are in most demand, chances are you'll be able to rent that unit quickly if that tenant decides not to renew.
But if the resident wants to renew, you offer them these three standard lease terms—month-to-month, six months, and 12 months. Here's the strategy behind this:
While switching to a month-to-month lease benefits the resident, apartment communities are at a natural disadvantage because they can't control when that lease expires.
Often residents defer to this lease term option because they need to figure out their future plans and are not in a position to make a move yet.
Considering that in this scenario, we're talking about a renewal in July, or right before the start of the slower leasing season, this puts the apartment community in even more of a predicament because the resident could move out in the middle of winter.
Therefore, the resident should pay a premium for switching to a month-to-month lease.
It makes sense to charge a higher rent than the rate they were paying, even though this goes against our renewal pricing philosophy. Residents who need a few more months to get their affairs in order usually understand the purpose of this increase as they're literally 'buying time.'
Meanwhile, it's also okay if they don't accept these terms because your apartments are in demand now. This is fair negotiation for both parties.
This option means the resident would move out in January, which isn't desirable for either side. Residents rarely want to move out in cold weather, while you want to avoid a vacant unit during the slowest time of year.
In terms of pricing, however, it's still fair to abide by the philosophy that there should be a premium for agreeing to a shorter lease term—especially if the renewal lease expires at a time that's not the best for your apartment community.
This is the ideal lease term offering in this scenario—at least for you. How can you make it fair for the resident?
First, you could offer a lower rental rate. You can also go beyond pricing if you have many vacancies and offer an appliance upgrade or free parking garage to further incentivize the resident for their loyalty should they agree to this renewal.
Now, take all this and reimagine that it's January when their initial lease expires. The month-to-month option may not change, but now you offer a slightly better deal for the 6-month renewal option because that lease would expire at the perfect time in the middle of your busy season.
Or instead of offering the 12-month renewal, you swap it with your 3-month renewal option because you'd rather have that unit go vacant ahead of when the busy season starts instead of next winter. You can see how your renewal strategy would be different in this scenario.
You must approach each renewal negotiation strategically to generate a fair outcome for yourself and the resident.
1. Strategic lease renewals ensure small vacancy problems stay minor:
2. Minimizing vacancies maximizes community NOI:
3. Focus on resident experience for higher lease renewals:
4. Fair pricing and renewal protection for community NOI:
5. Offer flexible lease terms strategically:
6. Leaning into lease renewals for 2024 financial success: